MarketView for January 4

 

 

Summary 

 

Wall Street kicked off the New Year with a bang on Monday as share prices rose sharply sending all three major equity indexes well into positive territory. A key reason for the large move was a report indicating that the manufacturing sector had expanded for the fifth straight month, lifting confidence in the global economy as the Street began to think about fourth quarter earnings. The Institute for Supply Management's manufacturing index rose to 55.9, the highest reading for that statistic since April 2006. A reading above 50 indicates expansion.

 

The report followed similarly strong readings from the manufacturing sectors in China and India overnight. The rally, which marked the first trading day of 2010, drove both the Dow and the S&P 500 to their highest closes in 15 months, while the Nasdaq closed at a 16-month high. At the same time, a weaker dollar helped push natural resource stocks higher as commodity prices rose.

 

Oil companies' shares were helped out by an upgrade from Deutsche Bank of the refining sector and higher ratings by the bank of Valero Energy and Sunoco. Valero was up 6.8 percent to close at $17.89, while Sunoco added 6 percent to close at $27.67.

Both of China's PMI manufacturing surveys rose in December, with the official reading hitting its highest level in 20 months. That was echoed in India, where the manufacturing index hit a 7-month peak last month.

 

Domestic sweet crude futures settled up 2.2 percent, or $2.15 per barrel, at $81.51 after hitting a 2-month high earlier in the session. The dollar fell 0.5 percent against a basket of currencies. Copper hit a 16-month high. However, traders were cautious over the dollar’s short-term future before Friday's non-farm payrolls report, which they hope will again add confirmation of further stabilization in the labor market.

 

Robert W. Baird upgraded Intel to "outperform" on expectations for a rebound in corporate spending on personal computers. That helped drive the Philadelphia semiconductor index up 1.7 percent. Intel, a Dow component and a bellwether on Nasdaq, closed up 2.4 percent at $20.88.

Volume, although modest, appeared to be the best since December 22nd, with most market participants back at work on Monday after a long holiday break.

 

Manufacturing Is Looking Good

 

The manufacturing sector grew at its fastest rate in nearly four years in December, its fifth consecutive month of expansion, according to a report by the Institute for Supply Management.

However, a separate report showed construction spending fell in November to a more than six-year low, depressed by a decline in homebuilding. Nonetheless, the Street kept its attention on the ISM national factory index, which rose to 55.9 in December from 53.6 in November. That was the highest reading since April 2006, when the index stood at 56.0.

The ISM data hinted at continued improvement on this front, with its closely-watched employment index edging up to 52.0 from 50.8 and new orders rising to 65.6 from 60.3. How much steam the economy builds in the coming months should help determine when the Federal Reserve raises borrowing costs from current record lows near zero, analysts said.

 

While the Fed said it plans to wind down most emergency lending by February, it has not deviated from a stated intention to hold rates low for "an extended period," which markets have interpreted to mean unchanged rates until at least the second half of 2010.

 

In a separate report, the Commerce Department said construction spending fell 0.6 percent in November. The decline to $900.1 billion, the lowest level since July 2003, was the seventh straight month of weakness in the industry. Spending on private home building dropped 1.6 percent, the largest decline since June, after rising 4.8 percent the prior month.

 

Novartis to Try and Acquire Remaining Part of Alcon for $39.3 Billion

 

Novartis plans to try and acquire the portion of Alcon it does not already own for $39.3 billion to reduce its reliance on prescription drugs. However, it is offering minority shareholders a worse deal than major owner Nestle.

 

Novartis, which bought 25 percent of Alcon in 2008, said on Monday it was exercising an option to buy an additional 52 percent from Nestle for $28.1 billion, raising its stake to 77 percent.

 

Novartis, which was widely expected to acquire the Nestle stake as soon as its option allowed, also plans to buy out the 23 percent held by minority shareholders for $11.2 billion, ending uncertainty over whether or not it would seek full control. Novartis is offering minorities 2.80 Novartis shares for each remaining Alcon share, which amounts to $153 per share, based on December 30 prices, versus the $180 agreed with Nestle.

 

Under Swiss law, Novartis can force through the deal once it takes majority control from Nestle as mergers require approval of two-thirds of shareholders and a simple board majority.

 

Novartis and rivals, such as GlaxoSmithKline and Sanofi-Aventis, are expanding into areas such as consumer healthcare and generics as they face the loss of patent protection.

 

Bought by Nestle in 1977 for $280 million, Alcon is the global leader in ophthalmic surgery products, particularly for cataract operations, and also produces medicines for eye diseases like glaucoma as well as contact lens products.

 

Novartis will bring it together with its own CIBA Vision contact lens business to create an enlarged eye care business with pro-forma 2008 net sales of $8.5 billion.

 

Nestle, the Swiss maker of Nescafe coffee and KitKat chocolate bars, said separately the deal would allow it to launch a new 10 billion Swiss franc ($9.64 billion) share buyback program for two years once its existing 25 billion program is completed this year. Once the deal is completed, Nestle will have realized more than $40 billion from its gradual divestment of Alcon, including the sale of 23 percent in an initial public offering in 2002.

 

Alcon said its independent director committee was reviewing the Novartis offer and noted minorities were being offered about 15 percent less than Nestle was getting. Novartis needs full control of Alcon to achieve planned annual pre-tax synergies, which it projects at $200 million three years after closing the deal with Nestle. It sees a further $100 million on winning 100 percent.

 

Novartis said it expected to complete the deal with Nestle in the second half of the year, funding it from available cash resources and up to $16 billion of external debt financing. The plan to pay minorities in Novartis shares rather than cash will help the Swiss company maintain its credit rating. The company will also ask its shareholders to approve the issuance of 98 million new shares to pay for the Alcon minority shares, together with 107 million shares held in treasury.

 

Fed Governor Elizabeth Duke Reaffirms Fed Position on Interest Rates

 

The Federal Reserve sees a moderate economic recovery continuing in 2010, but needs to keep interest rates "exceptionally low" for an "extended period" to foster job growth, Fed governor Elizabeth Duke said on Monday that slack in the economy was likely to remain above historical norms for some time, helping to keep inflation subdued.

 

"In the current environment, the FOMC continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period," Duke said. "Such policy accommodation is warranted to provide support for a return over time to more desirable levels of real activity and unemployment in the context of price stability."

 

In remarks to the Economic Forecast Forum in Raleigh, North Carolina, Duke said recent data on production and spending suggested that economic activity continued to increase at a "solid rate" during the final months of 2009 after real GDP turned positive in the third quarter. A copy of her remarks was made available in Washington.

 

"I expect to see a continued moderate recovery in economic activity in 2010, supported by a further healing in financial markets and accommodative monetary policy," Duke said. But echoing comments by Fed Vice Chairman Donald Kohn in Atlanta on Sunday, Duke said constraints on lending would slow recovery.

 

She noted that there were still strong headwinds in the housing market, which is being buffeted by high numbers of foreclosures, tight credit for home builders and reduced mortgage availability for some households. Commercial real estate also faces challenges from vacancies brought on by loss of jobs, and the sector will lag the improvement in the overall economy.

 

She said credit also remains tight for businesses, and her outlook for continued growth depends on further progress in repairing financial markets and restoring the flow of credit to households and businesses.

 

But should economic conditions and the outlook change significantly, she said the Fed would adjust its policy stance and had "a wide range of tools for removing monetary policy accommodation when that becomes appropriate."

 

Furthermore, Duke said companies are reluctant to hire because pressure to control costs and hold efficiency gains will remain strong until recovery is more certain.

 

"As a result, I expect that businesses will begin to add jobs this year, but I anticipate that they will do so cautiously in order to hang on to their cost savings and efficiency gains," she added. "Even as the unemployment rate begins to decline later this year, it likely will remain high by historical standards."